New York AG Announces SHIELD Act

Monday, November 6, 2017

On November 2nd, New York Attorney General Eric T. Schneiderman announced his proposal of the SHIELD Act – Stop Hacks and Improve Electronic Data Security Act – a bill that would heighten data security requirements for companies and better protect New York residents from data breaches of their personal information.

“It’s clear that New York’s data security laws are weak and outdated. The SHIELD Act would help ensure these hacks never happen in the first place. It’s time for Albany to act, so that no more New Yorkers are needlessly victimized by weak data security measures and criminal hackers who are constantly on the prowl,” said Attorney General Eric Schneiderman.

Key aspects of the proposed SHIELD ACT include:

Covering any business that holds sensitive data of New York residents. Interestingly, the proposed legislation would amend the existing breach notification requirement to remove language currently limiting application of the notification rule to persons or businesses that conduct business in New York

Businesses that are already regulated by and comply with certain applicable state or federal cybersecurity laws (e.g., HIPAA, NY DFS Reg 500, Gramm-Leach-Bliley Act) are considered “compliant regulated entities” under the SHIELD Act. These entities and others that are annually certified by an authorized and independent third party to be compliant with certain data security standards, such as the most up to date version of the ISO /NIST standards, are called “certified compliant entities.” These entities are deemed to be compliant with the proposed law’s reasonable safeguard requirements, and a safe harbor from state enforcement actions would apply to “certified compliant entities”

A more flexible standard would exist for small businesses (less than 50 employees and under $3 million in gross revenue; or less than $5 million in assets)

Data breach notification obligations would become broader by (i) adding “access to” (in addition to the current trigger “acquisition”) as a trigger for notification, and (ii) expanding the data elements that if breached would require notification to include username-password combination, biometric data, and HIPAA covered health data

Deeming inadequate security to be a violation of General Business Law § 349 and permitting the Attorney General to bring suit and civil penalties under General Business Law § 351

AG Schneiderman’s proposed bill comes on the heels of several massive data breaches and ransomware attacks (e.g., Wanncry). The proposed SHIELD Act has the support of two major sponsors in the State Legislature: Senator David Carlucci (D-Clarkstown) of the Independent Democratic Conference and Assemblyman Brian Kavanaugh (D-Manhattan) who led their chamber’s consumer protection committees.

Although the SHIELD Act is a significant step forward for the Empire State, it does not come as a surprise. Attorney General Schneiderman has been vocal and proactive in the pursuit of heightened data security. Following a recent massive credit reporting agency breach, Schneiderman sent formal inquiries to the two other major credit reporting agencies, asking them to detail their security measures, steps they have taken since learning the breach and how they will further assist consumers in protection of their personal information.

In addition, AG Schneiderman has issued several enforcements actions in 2017 against companies that have failed to effectively protect consumer information. In January, Schneiderman announced a settlement with Acer Service Corporation, a computer manufacturer in Taiwan, after a data breach of its website exposed 35,000 credit card numbers. An investigation by the AG office revealed that sensitive customer information had not been protected for almost a full year. Acer agreed to pay $115,000 in penalties and improve data security practices. In April, Schneiderman announced that TRUSTe, Inc., agreed to settle allegations that it failed to properly verify that customer websites aimed at children did not run third-party software to track users. TRUSTe agreed to pay $100,000 and “adopt new measures to strengthen its privacy assessment”. In June, Schneiderman issued his first enforcement action against a wireless security company, Safetech Products LLC, for failing to implement adequate security in its Internet of Things (IoT) devices. It was found that Safetech did not force users to reset default passwords, and did not encrypt passwords sent over the network. As part of the settlement agreement, Safetech agreed to implement a written comprehensive security program.

AG Schneiderman did not begin enforcing New York’s data security laws and regulations in 2017; the issue has been a growing area of concern in his office for some time. In January of 2015, on the heels of former President Obama’s announcement of a cybersecurity legislative proposal, AG Schneiderman indicated his own plans to propose legislation to heighten New York’s data security laws.

The SHIELD Act, if enacted, would have far reaching effects, as any business that holds sensitive data of a New York resident would be required to comply. Moreover, given the nation’s heightened awareness of cybersecurity in the wake of the recent massive data breaches, other states may also consider similar legislation.